Banks need to monitor their exposures to the retail and small businesses as both the segments are witnessing high stress, the Reserve Bank of India cautioned.

Consumer credit deteriorated after the six-month loan moratorium programme came to an end in September 2020. Customer risk distribution of the credit active population underwent a marginal shift towards the high-risk segment in January 2021 relative to January 2020, RBI said in its bi-annual financial stability report (FSR). Consumer credit portfolios of non-public sector banks are “seeing incipient signs of stress”.

Public sector banks have undertaken restructuring under all the schemes. Private banks, on the other hand, have participated significantly only in the Covid-19 restructuring scheme offered in August 2020.

"Despite the restructuring, however, stress in the MSME portfolio of PSBs (public sector banks) remains high," the report said.

In the case of credit to micro, small and medium enterprises, there was a healthy growth of 9.23% shown by private sector banks versus state-run banks’ 0.89% growth. This was led by the faster growth to ECLGS (Emergency Credit Line Guarantee Scheme) of the government, under which Rs 2.46 lakh crore were sanctioned as of February 2021.

The FSR said that since 2019, weakness in the MSME portfolio of banks and NBFCs has drawn regulatory attention, with the Reserve Bank permitting restructuring of temporarily impaired MSME loans of up to Rs 25 crore under three schemes.

The net credit flow to stressed MSMEs during March 2020-February 2021 rose to Rs 50,535 crore with the shares of PSBs and private banks at 54 per cent and 35 per cent, respectively. The transition from low and medium risk MSME borrowers, year-on-year basis, to the high-risk segment was noteworthy

The RBI asked banks to shore up capital positions while favourable market conditions prevail, improve governance and remain vigilant in the context of global spillovers.

"The banking sector will be required to specifically guard against adverse selection bias while being alive to the credit demand from productive and viable sectors," the FSR said.

In the most optimistic scenario, the impact of the second Covid wave should be contained within the first quarter of the year, while frictional inflation pressures work their way out over the first half of the year, the report said, asking banks to internalise the expectations.

Delinquency rates for state-run lenders in consumer credit improved to 1.8% in January 2021 from 2.9% a year ago, while the same for private sector banks doubled to 2.4% and increased to 6.7% from 5.3% for non-bank lenders.

On the wholesale credit, the FSR said the pandemic has accentuated the slowdown in wholesale credit relative to retail credit, with the overall exposures declining by 0.8%, news agency PTI reported.

A size-wise disaggregation of wholesale credit growth points to decline in banks' exposure to large wholesale borrowers while the relatively smaller borrowers with loan sizes between Rs 5-100 crore maintained a sustained appetite for credit.

From an asset quality perspective, there was considerable deterioration, with migration to impaired status across all SMA (special mention account) categories, the report said.